CME Denies Rumors About 1000-Point Stock Drop

CME Group has issued a statement following rumors that erroneous or irregular trades by Citigroup Global Markets Inc may have been the cause for a more than 900 point drop in the Dow Jones Industrial Average during mid-day trading on Thursday:

“While our policy is not to comment on individual participation in our markets, in light of volatile market conditions, CME Group confirmed that activity by Citigroup Global Markets Inc. in CME Group stock index futures markets does not appear to be irregular or unusual in light of market activity today.”

CME Locks Up Nymex

CME completed its acquisition of the Nymex over the weekend. It will be interesting to see how this impacts the futures markets. We should perhaps ask them to eliminate so many redundant fees. A single fee for users would be more appropriate in a competitive marketplace.

Approved: NYMEX and CME to Merge

This gets me very excited. The U.S. Justice Department approved -- without conditions -- the merger plans of the NYMEX and the CME Group. I hope that they will do they customers a service and merge the fee structures as well. Between them, traders are paying 4 different fees for data. I wouldn't mind a little higher fee, but come on, guys! Let's combine it all into just one fee for data instead of all these hold-overs from an earlier era when there were several exchanges.

Overall, the futures market has been very well served by these exchanges, which have worked exceptionally well. Costs have been kept reasonable, and service has been excellent. The CFTC is one of the few Federal agencies that have served its community well without high costs or onerous regulation.

News from CME on Grains Settlements

From the CME this morning:

The CME will change the way it calculates the settlement prices in grains and the soybean complex today. Nearby contracts will settle at the midpoint of the closing ranges, and deferred contracts will then settle based on spread relationships in the pits.

Wheat: USDA Says Stocks at 60-Year Low

From the CME website this morning:

"tightness is expected to persist with the USDA pushing ending stocks to a 60-year low".

U.S. grain stocks are at60-year lows! Note since World War II has grain in storage been so low in the United States! I hope you have some grain in storage, or you may soon not be able to eat! That sounds very bullish for wheat prices long-term.

On the other hand, the CME website also conveys a somewhat bearish sentiment for soybeans. Of course, as it says in Mark Douglas' book, "Trading in the Zone", one of the five fundamental truths of trading is that "anything can happen".

Influence of US Dollar on Grain Prices

Here is another posting from the mid-day on the CME website. Note the acknowledgment of the influence of the sinking US Dollar on grain prices! Anyone who suggests that the debasement of the American currency has no effect on commodity prices must be either deluded, ignorant, or in denial!

May soybeans opened 3 1/2 cents higher on the session at 15.12 and established an early range of 14.59 1/4 to 15.13 1/4. Another sharp drop in the US dollar and strength in other commodity markets had traders calling for the market to open up 10-15 cents higher but speculative long liquidation selling in soybeans and follow-through technical selling from the sweeping reversal in oil helped drive the market sharply lower into the mid-session. Weekly export sales for soybeans came in at just 204,600 tonnes which was about half of what was expected. Cumulative sales, however, have reached 94.5% of the USDA forecast for the 2007/2008 marketing year as compared with 86.6% as the 5-year average for this time of the year. Good weather in South America, a revision higher in Brazil production from the Brazil government and hefty deliveries for soybeans and oil added to the negative tone and helped push the market to the lows into the mid-session. Meal sales came in at 75,900 tonnes and oil sales were 6,800 tonnes. Cumulative soybean oil sales have reached 82.7% of the USDA forecast for the 2007/2008 marketing year as compared with 48.8% as the 5-year average for this time of the year. Monthly soybean oil used to produce bio-diesel in January was just 202.9 million pounds. This was down from 219.9 million in December but still up 21% from last year. Usage was down for the 5th month in a row. Oil deliveries this morning were 1,835 contracts with soybeans at 1,469.

It is certainly noteworthy that in this CME mid-day commentary, the long-term bullishness for soybean prices is also mentioned. Imagine that before the U.S. soybean crop is even planted, 94.5% of it is already sold! That is very bullish, long-term!

Soybeans and Crude Oil

The following is quoted verbatim from the website of the Chicago Mercantile Exchange following yesterday's close and soybean price weakness. The CME is the exchange that trades most soybean futures in the United States. What is notable here is that the CME acknowledges that the price of soybeans is supported somewhat by the price of crude oil. Interesting!

Soybeans, meal and oil all opened higher and surged to sharply higher levels during mid-session on a combination of buying by funds, locals and commission houses. Volume was fairly heavy on the early strength and sharply higher crude oil was also cited as a major supportive factor. However, all three markets fell sharply late in the day led by oil where floor traders indicated that large scale commission house selling in the May contract appeared to precipitate the break. This generated liquidation selling across the soybean complex.

Wheat Prices Plunge to Lock Limit DOWN!

Wheat prices plunged overnight to lock limit down, after going lock limit UP 90 cents yesterday, and increasing 70 cents last night. Prices on wheat dropped more than $2.00 in overnight trading, after rising 70 cents in the first few minutes! I've never seen anything like this before in the futures markets!

Historical Precedent Just Two Weeks Ago?

This is very likely a short-term event, and may be a great buying opportunity, if history repeats itself. When the CME increased its lock limits from 30 cents to 60 cents 2 weeks ago, prices plunged because the increase in margins forced brokers to liquidate the long positions of many traders that no longer had account margins that were sufficiently large to cover their positions. This may have occurred again last night, since the CME increased the lock limit from 90 cents (just 30 cents 2 weeks ago) over the weekend to $1.35 -- more than doubling it in just two days! More forced selling has almost certainly occurred. I suspect prices may likely rebound within the next few days -- perhaps even today!

Grains Trading Relatively Subdued Today

Corn, soybeans, and wheat are all relatively subdued in their trading today. On days like this, I still make healthy profits by taking short-term trades using the tick charts. I can usually make as much money swing trading this way, as I would on a day when there is a distinct trend or mood to the market, as the last two days have been.

It's somewhat like comparing the length of a winding river bank to the length of the shore line of a lake. Does a lake have a longer shore line because it is a larger body of water? Or does a winding river have a longer shore line because it meanders over a much larger land mass? They are both different, but both cover a lot of territory. Likewise, both can be traded, but the trading is somewhat different.

The CME pre-market commentary suggested that there is much mixed news this morning and overnight, even saying that news in the soybean complex "was a little bit slow", so this suggests to me that consolidation and erratic trading might occur. The charts in this posting are wheat and soybeans for the first 1/2 hour of today's session. This erratic trading could also perhaps be a signal that the plunge in grains prices (over the previous two days) has found support.

If grains won't cooperate, then...

let's short the Aussie!

Saving Money Trading Forex

The Chicago Mercantile Exchange allows futures traders to trade Forex with tighter spreads and lower commissions.

Most of the Forex brokers claim that their trading is commission-free, but this isn't entirely truthful. Weren't they ever taught by dear old Mom to tell the whole truth? Instead of charging a commission, they just widen the bid/ask spread and make their profits that way. It is much more expensive for a trader to trade that way, because that bid/ask spread ultimately comes out of of the trader's pocket! There is no free lunch, and we traders are paying for the lunch!

I have come to learn that it is to the benefit of traders for orders to be processed through a centralized exchange like the CME. Since all orders are processed through the exchange, spreads are generally only 1 tick for liquid futures contracts. With a commission of only about $4 per trade, the break-even point is only 1-2 ticks.

Contrast that with the typical Forex broker. They charge no commission (so they say), but instead, they widen the bid/ask prices to 3-5 pips. Thus, your cost is at least $30-$50 just to break even. You must make from 4-6 ticks/pips before you can make a profit. And that's assuming there is NO slippage! This is the dirty little secret that the brokers of the retail Forex industry hope traders will never learn. They make their livelihoods from trader ignorance! But ultimately these brokers shoot themselves in the foot; because the churn in retail Forex traders is so high, they must constantly replace their client base. Their marketing costs sky-rocket, and they spend astronomical amounts of money seeking to constantly bring in new business. No wonder they widen their spreads so much!

Which would you rather do? Trade the retail Forex market, where you must make $40-$50 just to break even, or trade the currency futures through the CME, where you need to only make 1 tick ($10-12.50) to break even? The answer should be obvious!

As an example of this, my own broker funnels their Forex trades through one of the world's largest, most prominent Forex brokers. If I trade Forex (major crosses) through my broker, they charge me $2.67 per trade with a bid/ask spread of about .5-1.5 ticks (pips). However, if I trade directly with the same Forex broker at the retail level, instead of through my own at the wholesale cost, that same Forex broker widens the bid/ask spread to 3-5 ticks (ticks=pips), a difference of at least $30 in cost to the trader! The orders are both processed through the same company!

That's why I trade Forex through the Chicago Mercantile Exchange, where I pay about $4 plus 1 tick spread on futures processed through the CME exchange, rather than trade Forex through a retail Forex broker. I can also trade through my futures account rather than open a separate account just to trade currencies. It all comes down to MONEY - MY money!

In a business in which most people lose money, I'm not going to throw money away by spending more than I need to. The bid/ask spread is of critical importance in trading profitably. The tighter the spread, the more money in MY pocket.